The Costs of Shared Ownership: Evidence from International Joint Ventures

52 Pages Posted: 28 Aug 2002

See all articles by Mihir A. Desai

Mihir A. Desai

Harvard Business School - Finance Unit; National Bureau of Economic Research (NBER)

C. Fritz Foley

Harvard University - Business School (HBS); National Bureau of Economic Research (NBER)

James R. Hines Jr.

University of Michigan; NBER

Date Written: July 2002

Abstract

This paper analyzes the determinants of partial ownership of the foreign affiliates of U.S. multinational firms and, in particular, the marked decline in the use of joint ventures over the last 20 years. The evidence indicates that whole ownership is most common when firms coordinate integrated production activities across different locations, transfer technology, and benefit from worldwide tax planning. Because operations and ownership levels are jointly determined, it is helpful to use the liberalization of ownership restrictions by host countries and the imposition of joint venture tax penalties in the U.S. Tax Reform Act of 1986 as instruments for ownership levels to identify these effects. Firms responded to these regulatory and tax changes by using wholly owned affiliates instead of joint ventures and expanding intrafirm trade and technology transfer. The implied complementarity of whole ownership and intrafirm trade suggests that the reduced costs of engaging in integrated global operations contributed substantially to the sharply declining propensity of American firms to organize their foreign operations as joint ventures over the last two decades. Estimates imply that as much as one-fifth to three-fifths of the decline in the use of joint ventures by multinational firms is attributable to the increased importance of intrafirm transactions. The forces of globalization appear to have diminished rather than accelerated the use of shared ownership.

Keywords: Multinational Business, Joint Ventures, Alliances, Organizational Form, Intrafirm Trade

JEL Classification: F23, L23, G32, H87

Suggested Citation

Desai, Mihir A. and Foley, C. Fritz and Hines, James Rodger, The Costs of Shared Ownership: Evidence from International Joint Ventures (July 2002). Available at SSRN: https://ssrn.com/abstract=324123 or http://dx.doi.org/10.2139/ssrn.324123

Mihir A. Desai (Contact Author)

Harvard Business School - Finance Unit ( email )

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C. Fritz Foley

Harvard University - Business School (HBS) ( email )

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National Bureau of Economic Research (NBER)

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James Rodger Hines

University of Michigan ( email )

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